Economy HawaiiWritten by Dennis Hollier On 16 July 2012
Hawaii’s Healthcare Industry and the Affordable Care Act

Over the last several weeks, I’ve been speaking with the  CFOs and CEOs from more than a dozen of Hawaii’s largest companies. Mostly, we’ve been talking about the economic and business factors that affected the profitability of their organizations in 2011. (Check out the story in our Top 250 issue in August). My mind rarely goes in a straight line, though; so when I’m doing interviews, the conversation invariably wanders off subject. Usually, these digressions are the best parts of the conversation, and even if this material never makes it into the story at hand, I can salt it away for future reference. Consequently, it’s sometimes edifying to go back and reread my notes from old interviews. Today, for example, as I was going through my notes from my conversations with Hawaii’s CFOs, I noticed a recurring theme – one that may be alarming.

As it happens, many of Hawaii’s largest companies are in, or associated with, the healthcare industry, a sector that we all know is undergoing some dramatic changes. Not surprisingly, my conversations with the executives from these companies turned occasionally to the biggest story of the day: the Patient Protection and Affordable Care Act, the law disparagingly referred to by Republicans and Tea Partisans as “Obamacare.” My previous discussions about the ACA with healthcare professionals had always revolved around how the law would affect the consumer. But, in the course of my conversations with CFOs and other executives in the healthcare sector, I had a chance to ask the bean counters what they thought of the law. My impression is that they’re scared.

For example, John Henry Felix, CEO of HMAA, is one of the most vocal critics of the current attempt at healthcare reform. In an email, he wrote, “The single greatest change we are experiencing in our business has to do with the federal government’s Affordable Care Act. The law has made it more difficult and more expensive to do business in Hawaii. This is thanks not only to the law’s enormous complexity – the bill was over a thousand pages long – but to the even more voluminous rules and regulations being written to implement the law, which is by now merely the tip of the iceberg.”

For hospital executives, the trepidation about the ACA may be even more pronounced. Hawaii Health Systems Corporation, as the State’s hospital of last resort, is particularly vulnerable to changes in Medicare/Medicaid. In its 2011 annual report, they go to great lengths to point out how the system’s financial health has been damaged by changes in funding for Quest and other programs. More to the point, they emphasize the two main challenges facing HHSC: the implementation of electronic medical records, and the economic fallout from the ACA. Of course, those two things are related; some of the “incentives” built into healthcare reform hinge on the presumed efficiencies to be found in EMR. In any case, the cash-strapped HHSC expects to pay nearly $28 million for its Soarian Electronic Medical Records and Health Information System. In addition, HHSC expects the ACA to generate another $56 million in expenses over the next ten years. And that’s not even a comprehensive accounting. No wonder they’re nervous.

But the main problem with the ACA, in the eyes of Hawaii’s healthcare executives, is that no one really knows how it will turn out. Despite the law’s legendary 2,000-plus pages, (poor Justice Scalia), most of the details still haven’t been worked out. That makes it hard for the people who are responsible for planning and managing Hawaii’s healthcare organizations to know exactly how to proceed. Speaking before last week’s landmark Supreme Court’s decision, Rick Keene, the CFO of Queen’s Medical Center, offered some of the most cogent commentary on this lack of clarity. “That’s one of my problems with healthcare reform,” he says. “So much of it was left unclear and unknown that it’s really hard to anticipate with the impact is going to be.” And, although the Court’s upholding of the “Mandate” offers a little more clarity, it’s still not obvious how the whole thing plays out financially for hospitals and insurance companies.

That’s not to say that industry experts would deny that the current healthcare system is broken. “I don’t think anybody in the industry would deny that some aspects of healthcare reform are needed,” Keene said. “But what are the right steps to take? That’s the difficult thing to decide upon.”

For CFOs, like Keene, healthcare often comes down to debits and credits, assets and liabilities. You’ve got to know how those all balance out before you can provide a lick of care to patients, let alone plan for the future. From Keene’s perspective, that’s what’s so scary about the ACA. He notes, “When I go to my board and present financial information and future forecasts on thing like: How we think things are going to play out in the markets? How do we fund our operations? How do we anticipate the returns on our portfolio? What is going to be the accessibility of debt in the future to support our operations? It’s really, really difficult to look forward and make any firm estimates on what the future holds.”

Of course, Hawaii’s healthcare organizations are doing their best to look ahead. That’s what’s potentially alarming. “We have run multiple financial scenarios looking forward,” Keene said. “In some case – which I think are extreme cases – there will be a significant negative impact on hospitals, and not just Queen’s. We don’t think those scenarios are going to play out, but given what we know about healthcare reform, there are scenarios that paint a very, very negative picture about the future financial capabilities of hospitals. I would say most of the scenarios show us having to change a lot of the ways we do things, but in the financial perspective, hopefully it’s a break-even scenario for us. It’s not going to be financially beneficial to us, but hopefully it can be managed in a way that’s not financially negative to us. But there are some situations where it could be extremely negative for us.”

Keene also offered a more specific explanation. “One of the big things in healthcare reform has been to get more people covered by insurance,” he said. “We’re going to provide insurance coverage for all these millions of people who today have no insurance. Net/net, that should be better for everybody, right? But that’s part of the uncertainty. If they extend insurance coverage to everyone, how’s that going to get paid for? What does that do to our current reimbursements? Are they going to take the same amount of reimbursements that we get today and spread it over more people? If that’s the case, it’s not going to be any different for us. We’re going to get the same money, we’re just getting it for more people.

“Let’s say today we provide service to 100 people; 90 of them are covered by insurance and 10 of them aren’t. The services that we provide for those 10 who aren’t covered is a flat write-off for us; it’s charity care. On the other 90, we get insurance coverage. Now, let’s say that’s all Medicaid. Well, if they extend coverage to all 100 people, but they lower the reimbursement on the 90 percent to cover the 10 percent, net/net, we’re still getting the same money and we’re still treating the same number of people. We have less charity care, so the government can now say, ‘Yes, everybody’s now covered by insurance,’ but it’s no different for us, other than where we classify it in our financial statements.” The problem, he says, is if the net effect were to move consumers from private insurance, like HMSA, to Medicaid or other government programs that pay substantially lower reimbursements.  Then, hospitals like Queen’s could be left paying the bill.

That would be a disaster.

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